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Barriers and Constraints to Growth of Small Businesses

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Published: Mon, 01 May 2017

It can be said that small businesses nowadays are considered as the key driving force to economic growth and sustainability no matter where in emerging or developed economies. They contribute greatly in economic development in terms of high profit returns, job creation and poverty elimination. Much effort has been placed to promote the development and growth of these firms however, entrepreneurs have still encountered barriers and obstacles which may constrain their long term survival and limit their optimal part to play in the economic growth. Quite a few researches and studies have been carried out to figure out the role of small business as a whole as well as the main difficulties they are facing in order to encourage their setup, development and flourish. This paper aims to look into some selected articles and researches on the same issues to provide a better view about the rocks and ropes on the small business growth path.

INTRODUCTION

Small businesses since their setup from theory and practice have not been an easy job with many issues related to specific industry and different kind of entrepreneurship characteristics. According to Sauser, 2005 and Monk, 2000, starting a business mean taking a risk and not many small business owners are successful in their first five-year development. Therefore, a deep understanding of the hidden obstacles which negatively affect small businesses together with the short-term and long term strategies are needed to avoid massive failure. Regarding all the selected articles which provide the thorough analysis and literature review on the factors of high growth firms and the main constraints hindering the development and growth of small business, almost of them are written by professors, lecturers, or fellows of the Development Studies of big universities across the UK. They have expressed their views on the growth of small businesses by well-researched works and long observations on different kinds of small businesses including manufacturing and service. Case studies are carefully investigated along with adequate qualitative and quantitative methods which backed up their findings. This paper is to review on their research and is divided into 3 main parts. Part one is about the brief induction to the issue discussed. The main discussion comes next looking at the researches on the firm’s growth patterns which can be achieved via the investigation of the relationship among firm’s age, size, industry and ownership and discussion on the difficulties, barriers and the last part is about some suggestions, recommendations to partly help dismantle barriers and enhance the better development, competiveness of small businesses.

MAIN DISCUSSION

Reviews of the growth over time of small business on different industries

According to Evans, (1986) on his ‘Test of Alternative Theories of Firm Growth” which examines the relationships between firm’s size, age and its growth over 20,000 manufacturing firms from 1976 to 1982, he indicated that firm’s growth is in an adverse relationship with firm’s size. This finding appears to go against the previous studies done by Simon and Bonini (1958) and Lucas (1967, 1978) and Jovanovic (1982) which claimed that “firm growth is independent of firm size”. However, using the data of Small Business Data Base by the US Small Business Administration in which data of employment is considered as the key indicator of firm size, he ran the empirical test and the estimation and statistic results showed that firm growth declines with the firm age holding firm size constant and that firm growth decreases with firm size for 89 out of 100 industries analyzed. He came to this finding based on the theoretical backgrounds of the above mentioned researchers who also imply this finding in their works, however, the data used and the criteria on their size and age of small businesses for mature and young firms are different which lead to the contradictory views on the same research.

On the other sides, Bryson, et al (2005) looked at the creation and growth of the service firms such as computer, financial and management services. In line with fast development of small businesses in the service industry in post industrial period, there is an increasing demand for expertise and customized services. Compared with the manufacturing firms which require higher capital and equipment investment, the small service firms are mostly established by the founders who have quite good reputation and experiences acquired whilst working for large firms. The study highlights the higher need for expertise, educational and professional qualifications for the foundation and development of new service business. Especially, the significant importance of networking and sub contractual relationship set service firms apart from the manufacturing counterparts and make them better function in the industry relying much more on customer base.

Also on the firm growth, Delma, et al (2003) have built a sample of high growth firm involving 19 different of firm growth measures such as sales growth, employee growth organic growth, acquisition growth. Some of the growth patterns are shaped but in relation with firm age and size as well as the industry association. There is a fact that firms grow in many different ways and a multiple measure seems to be appropriate in identifying firm growth patterns and growth processes. The study looks at different kinds of firm in Sweden with the size is set at 20 employees and use a cluster analysis which show a strong relationship between firm size and age, and industry. An emphasis is put on the heterogeneity in choice, validity, and reliability of different growth measures as determined from theoretical and methodological perspectives. The study provides sufficient and clear evidence from cluster differences about the fact that the ways firms grow vary greatly according to their demographic characteristics and firm high growth can be achieved in related to these demographic features.

Discussing about firm growth factors, Perren (1999) investigated the growth of firms through the owner’s motivation factor which includes the desire to success, desire to the his own boss and the influence of social life, family, friend on the owner motivation. The second factor is the managerial expertise which reflects his skills involve management skills in terms of time, resources, networking… The third factor is the resource access which means how firms can access to its capital, human resources and so on…On the other hands, concerning about the growth path of small firms, Schmitz (1995) explores the collective efficiency stemming from the firm’s competitive advantages in the local external economies and joint action. That could mean firm growth processes develop within the cluster (sectoral or geographic areas) and the efficiency is defined by the success in firm’s confrontation with imports and penetration into the international markets. The author used the case study of industrial clustering and the success of firms in crisis such as in Brazil, Korea and Taiwan in 1990s. In the meantime, Morrison, et al (2003), discussed about the two main factors for firm growth including pro-growth factors and inhibiting factors. The former factors are comprised by the owner’s intention representing the personal characteristics, values and beliefs then their ability in terms of knowledge, skills and expertise, the firm opportunities. By contrast, the inhibiting factors means the lack of ambition, long term vision, poor managerial skills, and the unfavorable financial, cultural, regulatory conditions…the study also implied that there is a close relationship between the intention, the abilities and opportunity which means one hardly can be achieved without the support of the others. Particularly, given the intention and vision the entrepreneur may have, lack of the support of the market condition, access to finance and the helpful governmental regulations, firm fail to sustain and grow.

Barriers and constraints to the development and growth of small business

Based on the fundamental backgrounds and understanding about the growth of small businesses, main obstacles and constraints hindering this growth are then identified and analyzed by practitioners and policy makers to help specific small firms properly acknowledge and better choose the precaution methods against failures.

Regarding to the barriers limit the development of small businesses both in manufacturing and service industries, Beck, et al (2005) mentioned the legal and financial effects on firm growth. Obviously, firms are under the direct influences of the environment they operated. Doing business in a developed legal and financial systems means firms have greater access to external financing, stable loans policies and benefit from a well-functioned of financial markets and financial intermediates. Vice versa, developing economies with the high level of corruption, tough and unpredictable regulations cause inadequate allocations of capital to small businesses and unstable growth rates. Also according to Beck, et al (2005), institutional characteristics themselves affect their development and survival. This is represented by the fact that small firms do benefit from tax, regulatory requirements and financial markets by larger ones, which are always under the unpredictable threat from regulation changes and financial fluctuations.

Leonidou (2004) on the other hands takes a closer look on barriers to the small business export development. In the study, he examines 39 export barriers previously researched by 32 empirical studies in the period of 1986 to 2000. He first came to define the nature of export barriers, which constitutes “constraints that hinder the firm’s ability to initiate, to develop, or to sustain business operations in overseas markets”. These barriers mainly fall into 2 categories: internal and external. Internal export barriers involve the organizational resources, capabilities while the external ones are associated with the environment in host countries where the firms export. Regarding on the internal factors, Dichtl, Köglmayr, and Müller (1990); Abdel-Malek (1978); Bilkey and Tesar (1977), informational obstacles are considered important as firms hardly can be successful if it lack information in international market data, foreign business opportunities and overseas customer contacts. Another barrier export firms should take into consideration is the functional barrier, which represents in the management of time, human resources, production capacity and working capital. The last one is the marketing barrier which is related to the correlation of the 4 marketing mix. Moini (1997); Kedia and Chhokar (1986) showed that this is the largest problem area for the exporting firm, and it puts firms under the pressure of how to implement effectively the marketing strategies in the overseas markets. The coordination of the marketing mix means the localization of products which can meet the quality, technical, packaging requirements of the host countries, and the provision of reasonable prices for customers, the location of adequate logistics systems and the promotion plans, after sale services. Besides, external barriers consist of the procedural barriers representing in the familiarity with the regulation, customs, the lack of government assistance in tax and incentives; the environmental barriers such as the political, legal, socioeconomic conditions. Indeed, the poor economic situation, the foreign currency risk, political instability, unfavorable rules, high tariff and language hindrances can severely affect the establishment and growth of firms in international markets.

Moreover, concerning about the hindrances faced by the new start-up in North-West England, Fielden, et al (1999) emphasized the importance of this early stage which can decides the whole process of survival and success. He also identified financial difficulties as the main barrier encountered during enterprise formation. Because the pre-start-up which may take from 6 to 12 months, firms are in badly need of the financial sources to make the business work for example the equipment and premise investment, employment, training and education…

The other constraints lie in the market failures determined by other studies in terms of capital access, lack of market opportunity, slow initiative in innovation, lack of managerial skills, Kibera and Kibera, (1997); Thembe et al, (1997); Alila and McCormick, (1994). Lack of market opportunity means the lack of market access to the proposed products, the poor infrastructure, and low purchasing power. In addition, the level development varying among countries itself imposes numerous constraints to small business growth. Innovation is another driving force to firm development but at the same time can be the inhibiting factor to slow down firm development process. Small businesses are normally bound by the limited finance, hence end up with cost effective technology and limited returns to make innovation. However, the biggest constraint of all is the lack of skills. Harper (1994) pointed out that not all managers are entrepreneurs who can be able to run a business as it grows and ages. Managerial skills require the good control of production, sales, and finance. Also according to Leonidou (2004), decision-makers should be capable, risk taking and long term vision of the path his firm is going to take. Moreover, most of small firms lack of skills to adopt the commercial best practices. They fail to realize the full benefits of investment in training and education which may result in the high qualified staff.

CONCLUSION

This paper has provided a quick review on the selected articles concerning about the growth of small business as well as the identification of main barrier and constraints deterring firm growth. On the analysis of the firm growth, they have investigated the formation, development and growth of many types of businesses in different industries over time. Most of the analysis tried to look at the relationship between firm growth and firm size and age. Conclusion has been drawn through many empirical experiments to prove this relationship does exist such as firm growth decrease with firm age. Factors enabling or inhabiting this growth are also looked into in manufacturing as well as service firms. Regarding the main hindrances and constraints confronted by small businesses, much focus is put on the difficulties in financial access, managerial skills, environmental and institutional characteristics. These findings play an important role in making fundamental backgrounds and basis understanding for firm start-uppers, business educators as well as policy makers.

However, there is the fact that firms do grow in different ways in relation to their formation base, their demographic features and it is crucial for small firm managers to be aware of their own business, acknowledge the firm specific barriers and constraint that may hold back their survival and growth in the long run. Also, it is necessary for small firm’s owners to take the proactive measures to overcome these obstacles such as the enhancement of understanding about the firm growth, the thorough preparation to better access needed capital, information as well as market places. In addition, attention should be paid to the training and development of managerial skills which provides better control on the firm’s resources, better vision about firm growth and better confrontation with arising obstacles. Lastly, this understanding may help policy makers outline more favorable regulation which effectively assist small business right from the early stages and provide adequate assistance when firms are in troubles.


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